WASHINGTON -- The dollar's share of global foreign-exchange reserves fell to a record low in the third quarter as demand for U.S. assets waned after the subprime-mortgage market collapsed.

The U.S. currency accounted for 63.8 percent of reserves at the end of September, down from 65 percent at the end of June, the International Monetary Fund said today in Washington. The share of euros increased to 26.4 percent, from 25.5 percent.

The figures suggest central banks diversified out of the dollar as it fell to the lowest level in a decade. Investors sold a record amount of U.S. securities in August when defaults on subprime mortgages rippled through financial markets and the Federal Reserve signaled it would cut interest rates.

"The dollar seems to be losing, at least to some small extent, its favored status," said David Powell, a currency strategist at IDEAglobal in New York. "Foreign central banks aren't necessarily shunning dollar assets, but they were more attracted to other currencies."

China, Russia, and other countries with trade surpluses or rising energy-export earnings are setting up so-called sovereign wealth funds to increase earnings on their reserves. Speculation also intensified in the third quarter that Saudi Arabia, United Arab Emirates, and other Middle Eastern nations would follow Kuwait and end their currencies' pegs to the dollar.

...Total Reserves

Total foreign-exchange reserves increased in the third quarter to $6.04 trillion from $5.72 trillion at the end of June. The figures on currency allocations are based on a smaller total, $3.83 trillion last quarter, because not all central banks agree to identify the breakdown of their reserves.

The fund's quarterly figures go back to 1999, the year the euro was introduced. The dollar's share has declined from 71.1 percent in March 1999, while the euro's allocation has climbed from 18.1 percent.

While the dollar's share of foreign exchange reserves is declining, the size of dollar holdings has continued to rise with the gains in total reserves. The dollar amount climbed to $2.45 trillion in September from $2.08 trillion a year before.

"Small movements in the dollar's share are not very important," said Brad Setser, a fellow at the Council on Foreign Relations in New York who used to work at the U.S. Treasury. "The real issue is that the amount of dollars held by central banks is rising dramatically."

...Dollar's Decline

The Fed's trade-weighted broad dollar index, a measure of the U.S. currency's value against its counterparts from the biggest American trading partners, fell as low as 100.36 in September, the weakest since 1997. Since then, it reached a record low of 97.38 on Nov. 7.

International investors have reduced their holdings of U.S. stocks and bonds since the August credit collapse hammered the values of corporate bonds and securities tied to subprime mortgages. The losses spurred by rising U.S. mortgage defaults caused banks and securities firms worldwide to write off more than $80 billion.

Foreigners were net sellers of long-term U.S. financial assets in the third quarter, U.S. Treasury figures show. Monthly sales averaged $11.8 billion in the period, compared with average net purchases of $64 billion in the previous five years.

In August, when the credit rout sparked concern that banks would curtail lending, leading to a slump in spending that would send the U.S. into recession, foreigners sold a net $40.7 billion of American stocks.

...Confidence in Dollar

Treasury Secretary Henry Paulson and Fed Chairman Ben S. Bernanke expressed confidence last month that the dollar will keep its mantle as the world's top reserve currency.

"I don't see any significant change in the broad holdings of dollars," Bernanke said in answering questions at a Nov. 8 congressional hearing. The dollar "remains the dominant reserve asset and I expect that to continue to be the case," he said.

Paulson defended the dollar in remarks to reporters on Nov. 9, at a time when it had fallen to a record low against the euro and Canadian dollar and the weakest versus Britain's pound since 1981.

"The dollar has been the world's reserve currency since World War II and there's a reason," said Paulson, a former Goldman Sachs Group Inc. chief executive officer. "I put the U.S. economy up against any in the world in terms of competitiveness -- that's a fact."
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The next GATA conference
Friday and Saturday, April 18 and 19, 2008
Maybe "Gold Rush 21, The Sequel -- Who ARE Those Guys"?
Washington, D.C., area

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